SCOTUS to Hear Internet Sales Tax Case

The U.S. Supreme Court has agreed to hear an appeal by South Dakota of high-court precedent dating back to the pre-internet era. Depending on how the matter is resolved, it could effectively enable state and local governments to collect billions of dollars in sales taxes from online retailers.

In Quill v. North Dakota (1992), the Supreme Court considered a matter that involved a mail-order company. The Court held that retailers can be compelled to collect taxes only in states where the company has a physical presence. In doing so, the Court invoked a legal doctrine that precludes states from interfering with interstate commerce unless authorized by Congress.

South Dakota contends that the time is ripe to overturn past precedent.

In 2016, South Dakota passed a law aimed at overturning the Quill decision. In short, the law requires retailers with more than $100,000 in annual sales in the state to pay a 4.5% tax on purchases. South Dakota subsequently initiated legal action seeking a ruling that the legislation is constitutionally enforceable.

In its Supreme Court appeal, South Dakota stated that “[s]tates’ inability to effectively collect sales tax from internet sellers imposes crushing harm on state treasuries and brick-and-mortar retailers alike.”

In South Dakota’s petition, it stated the Quill decision not only deprives states and local governments of critical revenue, but “also of a power the Constitution and Tenth Amendment fully reserved to them.” “The damage to the Framers’ design is done when the States must go begging to Congress for powers that belong to them by right, as 25 years of congressional inaction on this issue have vividly shown,” the petition said.

Online retailers, including Overstock.com and Wayfair are opposing South Dakota, arguing that it should be up to Congress to make the rules regarding online taxes. The retailers argue that if past precedent is disregarded, small business will be unduly burdened.

Reported estimates are that state and local governments could have collected billions of dollars in 2017 had they been permitted to require sales tax payments from online merchants and other remote sellers. Those seeking change argue that due to the growth of companies such as Amazon and eBay states lose out on significant annual sales and use taxes.

States have enacted a number of laws in hope of collecting more sales taxes, particularly when in-state businesses are used as conduits. As a result, lawsuits have been initiated in states like Alabama, Colorado, Indiana, Massachusetts, South Carolina, Tennessee and Wyoming.

South Dakota is particularly hard hit because it does not have an income tax. Seven states have no income tax, including Florida and Texas.

“No one could have foreseen in 1992 the ways that internet retail would remake the American economy in 2017,” South Dakota argued in filing.

Importantly, the case will impact Amazon because a significant portion of its sales involve goods that are owned by third-party merchants. Amazon takes the position that it is the responsibility of the sellers to collect taxes. Many do not.

Justices Gorsuch, Thomas and Kennedy have expressed doubts about the Quill decision, in part, due to what Kennedy has expressed as a “startling revenue shortfall” in many states, and “unfairness” to local retailers and their customers. The justices will no doubt be interested in whether the retailers are able to make a powerful showing that the rational in Quill still applies.

Without question, the case provides the justices with an opportunity to reshape internet commerce.

A ruling that online retailers must collect and remit sales taxes, even in states where they have no physical presence, would be a landslide victory for states and traditional businesses.

Conversely, it would make it extremely difficult for smaller online retailers who would then have to become tax collectors and navigate a patchwork of state sales tax systems, akin to how the big boys, like Amazon, do.

The Senate passed a measure in 2013 that would allow states to collect sales taxes from online retailers if they had at least $1 million in annual sales there. It died in the House.

The case is South Dakota v. Wayfair.

Will states soon be able to require online retailers to collect sales taxes even if they lack a physical presence in the state?

Will the internet continue to be a tax free zone?

Will the Supreme Court reverse past precedent that prevents state and local governments from requiring retailers to collect sales tax for online purchases?

Stay tuned.

The case will be watched closely by lawmakers, states and online retailers.

Richard B. Newman is an Internet marketing compliance and regulatory defense attorney at Hinch Newman LLP focusing on advertising and digital media matters. His practice includes conducting legal compliance reviews of advertising campaigns, representing clients in investigations and enforcement actions brought by the Federal Trade Commission and state Attorneys General, commercial litigation, advising clients on promotional marketing programs, and negotiating and drafting legal agreements. You can follow him on LinkedIn at FTC Defense Lawyer.

ADVERTISING MATERIAL. These materials are provided for informational purposes only and are not to be considered legal advice, nor do they create a lawyer-client relationship. No person should act or rely on any information in this article without seeking the advice of an attorney. Information on previous case results does not guarantee a similar future result. Hinch Newman LLP | 40 Wall St., 35thFloor, New York, NY 1000

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